How much of Sempra's 2016 earnings growth came from one-time items rather than core operations?

Substantially all of the reported growth came from non-recurring items. The $617M pretax GdC remeasurement gain ($350M after tax and noncontrolling interests) and the $78M EnergySouth sale gain together outweigh the $206M pipeline-capacity charge, $131M TdM impairment and $44M Rockies Express impairment. Management's adjusted EPS of $5.05 is well below the GAAP $5.46 and below 2015 adjusted EPS of $5.17, suggesting underlying earnings declined slightly.

What is the financial exposure from the Aliso Canyon gas leak, and could it grow?

SoCalGas has recorded $780M of estimated costs and expects $606M of insurance recovery, which leaves a net exposure of roughly $174M before any further charges. The company says the estimate may rise significantly and excludes unsettled damage claims, restitution, civil and criminal fines, and future legal costs. Insurance coverage totals $1.2 to $1.4 billion, but there is no assurance that all costs will be covered, and any write-off of the insurance receivable would hit earnings directly.

Why did SDG&E and SoCalGas earnings decline in 2016?

Both utilities were hit by the 2016 General Rate Case final decision, which reallocated prior years' income tax repair benefits to ratepayers. SoCalGas took about $49M of after-tax charges and SDG&E about $31M, and both recorded additional charges tied to flow-through tax items. Higher operating costs also offset revenue gains at the utilities. The decline is largely a regulatory timing and reallocation effect rather than a deterioration of the underlying franchise.

What are the main capital commitments and financing risks for the Cameron LNG project?

Cameron LNG JV is building three liquefaction trains with an estimated total cost of about $10B, including about $7B of incremental investment, most of which is project-financed. Sempra guarantees up to $3.9B of the senior debt until financial completion. The EPC contractor has flagged in-service delays that will defer 2018-2019 earnings, and expansion beyond three trains requires unanimous partner consent, which one partner has said it will not provide.

Is the dividend increase sustainable given the capital spending plans?

The board raised the quarterly dividend to $0.8225 per share in February 2017, or $3.29 annualized, up about 9% from $3.02. Dividends paid were $686M in 2016 against operating cash flow of $2.3B, which covers the dividend. However, capex of $4.2B in 2016 and about $3.4B planned for 2017, along with external financing, means the dividend depends on continued access to capital markets and on the timing of large projects. The filing also notes that SDG&E and SoCalGas dividends may be limited to preserve authorized capital structures.

SRE/SREA 10-K FY2016 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.

Sempra Energy's 2016 combined Form 10-K (filed February 28, 2017, jointly with SDG&E and SoCalGas) reports GAAP earnings of $1.37 billion^a, or $5.46 diluted EPS, up about 2% from $1.35 billion in 2015.

Adjusted earnings, a non-GAAP measure management uses internally, were $1.27 billion^b, or $5.05 per share, after excluding a $617 million pretax remeasurement gain on the Gasoductos de Chihuahua (GdC) acquisition and several impairments and one-time items. Growth was driven by Sempra Mexico, whose earnings rose to $463 million, while Sempra LNG & Midstream swung to a $107 million loss on a $206 million charge to permanently release pipeline capacity. The California Utilities earned $570 million at SDG&E and $349 million at SoCalGas, both down year over year, largely because of income tax repair refunds ordered by the CPUC's 2016 General Rate Case decision.

The dominant risk for investors is the Aliso Canyon natural gas storage leak at SoCalGas. Sempra has recorded an estimated $780 million^c of costs and a $606 million insurance receivable, with $169 million of insurance proceeds received to date. The filing notes that the estimate may rise significantly and excludes unsettled damage claims and fines.

As of February 27, 2017, 250 lawsuits involving more than 14,000 plaintiffs had been filed, and injections at the facility remain suspended pending regulatory approval. Other material items include the Cameron LNG three-train liquefaction project, which is roughly $7 billion^d of incremental investment with Sempra guaranteeing up to $3.9 billion of project debt and facing potential construction delays, and about $352 million of SDG&E wildfire-cost regulatory assets whose recovery is not yet approved. Sempra's 2017 capital expenditure plan is about $3.4 billion, and the board raised the quarterly dividend to $0.8225 per share.

02—Key points

Key Highlights

GAAP earnings of $1.37B ($5.46 diluted EPS) vs. $1.35B ($5.37) in 2015; adjusted earnings of $1.27B ($5.05 per share) exclude a $617M GdC remeasurement gain and several impairments.
Sempra Mexico earnings rose to $463M (from $213M), boosted by the GdC acquisition, while Sempra LNG & Midstream posted a $107M loss after a $206M pipeline-capacity release charge and impairments.
Aliso Canyon leak: $780M of recorded costs and a $606M insurance receivable; 250 lawsuits with over 14,000 plaintiffs; the cost estimate may rise significantly and excludes fines and unsettled damages.
Cameron LNG three-train project: approximately $7B incremental investment with construction delays flagged, and Sempra guarantees up to $3.9B of project financing.
Regulatory headwinds at the California Utilities: 2016 GRC decision triggered about $83M (SoCalGas) and $52M (SDG&E) of pretax charges from income tax repair refunds, and SDG&E carries about $352M of wildfire-cost regulatory assets pending CPUC recovery.
Operating cash flow fell to $2.3B (from $2.9B) and capital expenditures reached $4.2B; 2017 planned capex is about $3.4B, and debt-to-capitalization is 53%.
Dividend increased to $0.8225 per quarter ($3.29 annualized) from $0.755, and IEnova's October 2016 equity offering reduced Sempra's ownership of IEnova to 66.4%.

03—One dollar

04—Financials

Financial Highlights

10-KFY2016filed February 28, 2017

Revenue$10.18B Net Income$1.37B13.5% Net Margin EPS (Diluted)$2.73 Total Assets$47.79B Cash & Equivalents$349.00M Free Cash Flow$2.31B

Financial Statements

FY2016 against FY2015

Line item	FY2016FY2015	FY2015	Change
Revenue	$10.18B$10.23B	$10.23B	−0.5%
Interest Expense	$553.00M$561.00M	$561.00M	−1.4%
Net Income	$1.37B$1.35B	$1.35B	+1.6%
EPS (Basic)	$2.74$2.71	$2.71	+0.9%
EPS (Diluted)	$2.73$2.69	$2.69	+1.7%
Shares Outstanding (Basic)	500.43M496.50M	496.50M	+0.8%
Shares Outstanding (Diluted)	502.31M501.85M	501.85M	+0.1%

05—Questions

Frequently Asked Questions

How much of Sempra's 2016 earnings growth came from one-time items rather than core operations?
Substantially all of the reported growth came from non-recurring items. The $617M pretax GdC remeasurement gain ($350M after tax and noncontrolling interests) and the $78M EnergySouth sale gain together outweigh the $206M pipeline-capacity charge, $131M TdM impairment and $44M Rockies Express impairment. Management's adjusted EPS of $5.05 is well below the GAAP $5.46 and below 2015 adjusted EPS of $5.17, suggesting underlying earnings declined slightly.
What is the financial exposure from the Aliso Canyon gas leak, and could it grow?
SoCalGas has recorded $780M of estimated costs and expects $606M of insurance recovery, which leaves a net exposure of roughly $174M before any further charges. The company says the estimate may rise significantly and excludes unsettled damage claims, restitution, civil and criminal fines, and future legal costs. Insurance coverage totals $1.2 to $1.4 billion, but there is no assurance that all costs will be covered, and any write-off of the insurance receivable would hit earnings directly.
Why did SDG&E and SoCalGas earnings decline in 2016?
Both utilities were hit by the 2016 General Rate Case final decision, which reallocated prior years' income tax repair benefits to ratepayers. SoCalGas took about $49M of after-tax charges and SDG&E about $31M, and both recorded additional charges tied to flow-through tax items. Higher operating costs also offset revenue gains at the utilities. The decline is largely a regulatory timing and reallocation effect rather than a deterioration of the underlying franchise.
What are the main capital commitments and financing risks for the Cameron LNG project?
Cameron LNG JV is building three liquefaction trains with an estimated total cost of about $10B, including about $7B of incremental investment, most of which is project-financed. Sempra guarantees up to $3.9B of the senior debt until financial completion. The EPC contractor has flagged in-service delays that will defer 2018-2019 earnings, and expansion beyond three trains requires unanimous partner consent, which one partner has said it will not provide.
Is the dividend increase sustainable given the capital spending plans?
The board raised the quarterly dividend to $0.8225 per share in February 2017, or $3.29 annualized, up about 9% from $3.02. Dividends paid were $686M in 2016 against operating cash flow of $2.3B, which covers the dividend. However, capex of $4.2B in 2016 and about $3.4B planned for 2017, along with external financing, means the dividend depends on continued access to capital markets and on the timing of large projects. The filing also notes that SDG&E and SoCalGas dividends may be limited to preserve authorized capital structures.

06—Continue

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